The insurance market

The insurance market
The whole of the Czech market, including life business, saw a total gross premium income rise of 10.8% in 2000 to Czk69.2bn (£1.24bn) from Czk62.5bn (£1.12bn). In 2000, 42 companies were licensed to operate in the Czech insurance market. These included eight branches of overseas insurers and 34 joint stock companies. In addition, there is one General Health Insurance Company (Vseobecna zdravotní pojist'ovna), which specialises in health covers, including insurance of medical expenses abroad.

Of all companies licensed, there were 19 non-life insurers and five life insurers, as well as 18 composites. The main European insurers in the market include Allianz, Commercial Union, Gerling, Gothaer, Generali, National Nederlanden, Uniqa, Wiener Staedtische, Winterthur and Zurich. The presence of foreign insurers has resulted in a growing range of available products , such as legal protection, dread disease and executive liability insurance.

Ceska pojistovna
This is the largest Czech insurer which was formed out of the former state insurer. Until October 1999, the company was the sole provider of third-party motor liability insurance. The main shareholder is PPF, through its subsidiary Cespo, but the state retains a significant holding in the company through the National Property Fund and Komercni Banka.

Kooperativa pojistovna
This firm is owned by the largest Austrian insurer Wiener Staedtische both directly and through its Slovakian operations. The company cemented its second place in the market by obtaining a significant share of the third-party motor liability insurance market.

Allianz pojistovna
This company is wholly owned by the German Allianz group. The company has achieved significant growth, having been established in 1992. Allianz Group appears to be keen to acquire further insurance capacity in the Czech Republic.

CS-Zivnostenska pojistovna
This is part of Ceska Sporitelna, the largest retail bank in the Czech Republic. The parent was privatised during 2000, being sold to the Austrian Erste Bank. Subsequently, an Erste Bank subsidiary, Sparkassen Versicherung (Austria), took a controlling interest in the insurer.

Exportni garancni a pojistovaci spolecnost
The company is also known as EGAP or Export Guarantee and Insurance Corp. The company engages in export credit insurance against political and commercial risks related to the export of goods and services from the Czech Republic.

IPB Pojistovna
This is the largest bancassurer in the market and the majority of premiums are life. During 2000, the parent IPB Bank lost its banking licence and was purchased by CSOB Bank. The ownership of IPB Pojistovna is the subject of legal proceedings.

Generali Pojistovna
The company is part of the Italian Generali Group, but all Central and Eastern European operations are overseen by the Austrian subsidiary Generali Holding Vienna.

UNIQA pojistovna
CRP is part of the Austrian UNIQA group and has received additional capital support from the European Bank for Reconstruction and Development. The company is achieving one of the fastest growth rates in the market.

First American Czech Insurance Company
One of a number of AIG subsidiaries in Central and Eastern Europe with a concentration in life business.

Komercni Pojistovna
The company is wholly owned by Komercni Banka, the second-largest in the Czech Republic and shortly to be privatised. The insurer expanded rapidly in 2000, having obtained a share of the third-party motor liability business well in excess of its prevailing market position.

According to the Czech Insurance Association (CAP), 2000 premium income was split between life and non-life at 32.9% (1999 31.9%) and 67.1% (1998 68.1%) respectively. Although the insurance penetration remains very low with premiums representing 3.4% of domestic GDP at the end of 1999 versus a 8.0% EU average, the non-life Czech market has grown rapidly.

Until October 1999, Ceska pojistovna, the former state company, had the monopoly on third-party motor liability business. Before the end of 1999, a number of companies received licences and the market for year 2000 liability contracts was then opened to competition. However, the government will retain control over pricing until 2003.

Ceska pojistovna and Kooperativa pojistovna have the monopoly on compulsory workers' compensation insurance, but only Kooperativa is currently allowed to underwrite any new contracts. This business is expected to be liberalised in the next few years.

Commercial insurance still remains the most important non-life sector and has been supported by the results from the privatisations over the past five years and from increased sums insured through a move towards replacement value (and away from value after depreciation). The low proportion of premiums from personal lines is attributable to the lack of an insurance-buying habit from the population, together with a difficult economic environment. There has been no sign that the 1997 summer floods have increased the insurance awareness of the Czech population, although the intense competition and resulting downward pressure on rates should, in time, increase insurance penetration when economic growth resumes.

The life market has been experiencing growth above the inflation rate, although this slackened off in 2000 to 14.3% from nearly 30% in 1999. However, tax incentives for life insurance were introduced late in 2000, which are expected to boost the market by over 30%.

The market remains highly concentrated, although the former monopolist, Ceska pojistovna, is seeing its market share decline. In 1995, the top-five companies held over 90% of the market, but this had only reduced to 80% in 2000, despite Ceska Pojistovna losing its monopoly position on the significant third-party motor liability market that year.

There is significant flood risk in the Czech Republic and the major floods of July 1997 prompted the industry to reassess its exposure and coverage in this area. The floods brought total damages in excess of Czk63bn (£1.13bn), although total claims amounted to Czk9.7bn (£174.1m).

Distribution methods
Distribution has been mostly through the branch and agency system. The majority of sales are done through the company's own force or through a network of self-employed agents. However, there is an increasing number of broking firms, due to the higher level of commissions obtainable through this channel and the lack of regulation in respect of distribution.

Banks are also becoming increasingly present, having seen the benefits of offering a full range of financial products. The top three Czech banks, Komercni, Ceska Sporitelna and CSOB, have major shareholdings in insurance companies. Although Ceská pojistovna's initial attempts to create a large bancassurance group failed following the accumulation of bad loan portfolios, it purchased Expandia Banka (now Ebanka) during 2000.

Direct selling is still in its infancy and CP-Direct, launched by Ceska Pojistovna in 1999, has not made significant inroads.

Insurance regulation and supervision
The Czech supervisory authority is the Department of Insurance and Supplementary Pension Insurance (Odbor pojistovnictvi a penzijniho pripojisteni) of the Ministry of Finance at:

Letenská 15
118 10 Praha 1
Czech Republic
Tel: +420 2 5704 1111

The Czech Insurance Association (Ceskà asociace pojistoven, “CAP”), whose members cover 99% of the total domestic premium income, is located at:

Na Porící 12
115 30 Praha 1
Czech Republic
Tel: +420 2 2487 5611
Fax: + 420 2 2487 5612

Insurance and reinsurance business in the Czech Republic carried out by authorised companies is regulated by the Insurance Act no. 363/1999 and Decree no. 75/2000 Implementing Act no. 363/1999 on Insurance Amendments to Related Regulation. The Insurance Act came into force on April 1, 2000.

Insurance and reinsurance companies operating in the Czech Republic are regulated by the Ministry of Finance, to whom annual report and accounts, together with monthly financial returns, must be submitted. Foreign insurance companies can conduct insurance business in the Czech Republic through a branch office and are subject to the regulatory regime of their country of domicile. The legal form of an insurer can be a state enterprise, a joint-stock company or a co-operative enterprise. Dedicated reinsurance companies were allowed for the first time in the 1999 Insurance Act. The Act forbids the authorisation of new composites and all those currently in existence have until 2009 to separate operations.

The 1999 Insurance Act has introduced new minimum solvency requirements, which are specifically linked to the type of business underwritten. A life insurer must have a minimum of Czk60m (£1.07m), non-life insurers must at the minimum have Czk34m (£609,640) for some lines of business and a reinsurer a minimum of Czk1,000m (£17.9m). For a non-life insurer writing multiple lines of business, the minimum capital requirement matches that of the line underwritten with the highest capital requirement.

Legislation requires annual accounts to be verified by an auditor. The Ministry of Finance can request an independent audit if there are reasons to doubt the correctness of the original audit or the company is experiencing deteriorating results. There is a standard format for the accounts. For the first time, regulations require the use of qualified actuaries in life and non-life companies.

Insurance and reinsurance intermediaries are required to register with the Ministry of Finance. They must have assets of at least Czk1m (£17,900) and provide indemnity insurance coverage for at least Czk5m (£89,628).

The ministry can intervene in an insurance operation in a number of ways if required:

  • it can request changes to key personnel
  • it can determine the level of post tax profits transferred to support capitalisation
  • order the company to submit a restoration plan
  • impose forced administration (except branch operations)
  • suspend authorisation
  • order a portfolio transfer
  • completely withdraw authorisation.

    Accounting conventions
    Asset valuations
    Investments in the balance sheet are valued at lower of cost and net realisable value, both in life and non-life. The principles governing the investment of technical reserves were amended in the 1999 Insurance Act and set out by the Decree of March 17, 2000.

    Czech companies can now invest outside the Czech Republic to include:

  • government bonds issued by member states of the European Union or the central banks of these states and bonds issued by the European Investment Bank, the European Bank for Reconstruction and Development or the International Bank for Reconstruction and Development
  • foreign securities traded on the public market of the member states of the European Union
  • foreign securities traded on the public market of the member states of the Organisation for Economic Co-operation and Development.

    Technical reserves evaluation
    The need to establish technical reserves according to the new accounting rules is described in the 1999 Insurance Act. Companies are allowed to set up tax-free technical reserves up to a maximum of 60% of premiums in non-life, including equalisation reserve (but excluding premium reserve). The limit in life is 100% of premiums.

    The unearned premium reserve is calculated according to a pro rata method or by another appropriate actuarial method. Claims reserves are calculated on a case-by-case basis (including the cost of settlement) or by actuarial methods. Reserves are made for claims incurred and reported but not yet settled, as well as claims incurred but not reported (IBNR). In addition, companies are allowed to set up a reserve for bonuses and premium rebates.

    An equalisation reserve is also allowed, provided that the fluctuations over a five-year period exceed at least once the level of premium income and, in the case of some types of insurance, that premiums for that type of risk represents at least 4% of total premium income or Czk1m (£17,900).

    The Czech Republic covers an area of 78,864sqkm and has a population of 10.28 million, based on July 1999 estimates, with the capital city, Prague, accounting for 1.2 million. The currency is the Czech koruna (Czk).

    The Czech Republic is a parliamentary democracy. The president is elected by the parliament for a five-year term. The last elections were held on January 20, 1998, and saw the re-election of Vaclav Havel, who has been president since February 2, 1993. He is not anticipated to be re-elected as a result of poor health as well as the fact that he was previously re-elected by only one vote. However, there is increasing pressure in the country to introduce direct presidential elections and strengthen the presidential powers. The prime minister is appointed by the president, currently Milos Zeman, and the cabinet is appointed by the president on the recommendation of the prime minister.

    The ratings of the Czech Republic are supported by:

  • The country's ongoing advancement and good prospects for extending reform during the next few years. In particular, recent progress with regard to banking and corporate restructuring, strengthened corporate governance (including better investor protection) and improved foreclosure and bankruptcy laws have been sufficient to ensure that the Czech Republic will be among the first group of transition economies to join the European Union (EU) in 2005, as expected by Standard & Poor's.
  • The continued significant near-term fiscal flexibility afforded by a low domestic-debt burden. Direct general-government debt at less than 16% of GDP at end-1999 leaves room for consolidation of the large debts of transformation institutions and state banks. The adjusted general government debt will remain modest (peaking at about 34% of GDP in 2001) even after the inclusion of about Czk290bn (£519.7m) in various losses and transfers to state banking institutions during 1999 to 2001. Interest payments on this defined debt is not expected to exceed either 4% of general government revenue or 1.5% of GDP at the peak in 2001.
  • An unfailingly strong solvency position, with a net external creditor positions for both general government debt (estimated at 35% to 36% of exports each year from 2000 to 2002) and the overall economy (11% to 13% of exports between 2000 and 2002) External liquidity also continues to be sufficiently strong. Reserves cover about 100% of the current account deficit plus long- and short-term principal payments from 2000 to 2002 and more than 160% of short-term debt
  • An excellent export performance supported by ongoing and expected high foreign-direct investment (FDI) over the medium term, reflecting accelerated privatisation and the Czech Republic's expected accession to EU.

    The ratings on the Czech Republic continue to be constrained by challenges of:

  • Reducing the current very large fiscal imbalance, caused mostly by the ongoing consolidation and restructuring of the banking sector, but also by the large and unsustainable share of social mandatory expenditures in total spending over the medium term.

  • Implementing politically-sensitive pension and health reforms over the medium term.
  • Establishing a healthy banking system that can intermediate efficiently strong capital inflows. The proper allocation of resources becomes an even more important issue, as the country needs to further modernise infrastructure and industry to ensure sustainable long-term growth.

    The stable outlook reflects the expectation that both in-progress and additionally-needed reforms will be implemented in time to ensure the Czech Republic's smooth entry into EU. Successful consolidation of reform could strengthen the country's credit standing over a multi-year horizon.

    Czech insurance analyst contacts:
    Ashley Gill London 020 7847 7077
    David Laxton London 020 7847 7079

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